Little buy-in while G20 buys time

The G20 summit failed to tackle growing concerns that currency wars between Washington and Beijing will undermine hard-won stability in the global economy.

A statement declaring that the group of developed and emerging nations will monitor developments for signs of countries artificially deflating their currencies gained a lukewarm welcome from critics who said the G20 had papered over the cracks of a problem that could jeopardise recovery from the financial crisis.

The summit set vague “indicative guidelines” to measure imbalances between their multispeed economies but—calling a time-out to let tempers cool—left the details to be discussed in the first half of next year.

In the final statement of the summit, the group’s fifth since the financial crisis plunged the world into recession in 2008, the leaders vowed to move towards market-determined exchange rates and shun competitive devaluations.

China
The proceedings were dominated by the verbal jousting between the United States and China.

China has stockpiled its trade surpluses whereas the US has been left with record trade deficits and Washington’s argument for progress towards a more balanced global economy is undermined by China’s policy of undervaluing its currency.

China responded that moves by the US Federal Reserve to print money were also having a distorting effect.
“Exchange rates must reflect economic realities,” US President Barack Obama told a news conference after the communiqué was agreed on. “Emerging economies need to allow for currencies that are market-driven.

This is something that I raised with President Hu [Jintao] of China and we will closely watch the appreciation of China’s currency.” Deep divides meant the leaders could not venture much beyond what was already agreed to by their finance ministers last month.

Negotiators had laboured until the early hours of the morning to thrash out an agreement their leaders could all endorse, despite sharp disagreements that were on public display in the days before the meeting.

‘Macro-prudential measures’
In a departure from earlier statements the G20 said it would allow emerging market countries with “adequate reserves and increasingly overvalued flexible exchange rates” to use “carefully designed macro-prudential measures”.

That is a green light for countries such as Brazil, which has already sought to stem massive inflows of capital, to take further measures, short of deliberately engineering a lower exchange rate.

Tempers had flared over the Federal Reserve’s latest $600-billion bond-buying programme aimed at strengthening a shaky recovery, and Ireland’s worsening debt troubles served as a reminder that the financial system is far from fully healed.

In particular the leaders were unable to agree on how to identify when global imbalances pose a threat to economic stability, merely committing themselves to a discussion of a range of indicators in the first half of 2011.

Tim Condon, the head of research at ING Financial Markets in Singapore, said it was “hard to disagree” with the vows of the leaders but they had fallen short of the progress hoped for going into the summit.

“They decided just to put down a lot of laudable objectives as the conclusion of the meeting and hope that they can do better, that more can be accomplished in future meetings,” he said.

Canadian Prime Minister Stephen Harper said: “G20 credibility does depend on showing results. We cannot get out of this with beggar-thy-neighbour policies. We need instead to continue to coordinate our actions going forward. The recovery is fragile. I don’t think the fact that we aren’t there yet, that we haven’t resolved all these problems, means we will fall back.”—Guardian News & Media 2010